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Advice
··3 min read·

Inves­t­ing during turbu­lent times: how foun­da­ti­ons can avoid the biggest invest­ment mistakes

Last April, the stock markets collapsed – with Swiss investors suffering short-term on-paper losses of up to 20 percent. The main reason? US President Trump announced drastic trade tariffs, sparking uncertainty and fears of a recession. It’s important to keep a cool head, especially in times like these.

April’s stock market slump was severe – but it was compa­ra­tively mild. In Febru­ary and March 2020, the coro­na­vi­rus crisis forced stocks in the vast majo­rity of sectors and count­ries into a down­ward spiral. And in 2022, first rising inte­rest rates and then the inva­sion of Ukraine brought finan­cial markets to their knees and resul­ted in the worst annual perfor­mance since the 2008/2009 finan­cial crisis. The Swiss Phil­an­thropy Perfor­mance Index (SwiPhiX) makes these sharp decli­nes crys­tal clear.

That said, the index also shows that it’s espe­ci­ally important to keep a cool head in such situa­tions. Most of the down­turns – inclu­ding the one in April – norma­li­sed within a short period of time. One funda­men­tal tenet when inves­t­ing is that avoi­ding the biggest invest­ment mista­kes is in itself a major gain.

Inves­t­ing mistake no. 1:
acting emotio­nally

When the stock markets take a tumble, inves­tors tend to act quickly and emotio­nally out of fear of perma­nent losses. But as is so often the case in life, fear is a bad advi­ser. Very often, the action taken turns out to be ill-advi­sed. What usually happens is that the market collap­ses and assets are sold at a loss. When the market reco­vers, the inves­tor then re-enters too late and only gene­ra­tes margi­nal price gains (if any at all).

Inves­t­ing mistake no. 2:
not inves­t­ing

The biggest mistake when inves­t­ing is not inves­t­ing at all. This happens very often – for exam­ple, because it simply never seems to be the right time or because the fear of the emotio­nal roller coas­ter caused by a down­turn is too great. Once you’ve carefully plan­ned your liqui­dity and reserve, you can think about inves­t­ing the foundation’s addi­tio­nal capi­tal, as the long-term poten­tial for returns is considera­ble. Impres­si­vely, the SwiPhiX shows that a typi­cal foundation’s port­fo­lio yields an average return of about 4 percent per annum. That’s four out of every 100 Swiss francs that could be allo­ca­ted to the foundation’s purpose or used for its opera­ti­ons each year.

Inves­t­ing mistake no. 3:
poor diver­si­fi­ca­tion

A very common mistake made by inves­tors is putting all their eggs in one basket. In other words, they often have a large part of their invest­ment holdings as shares in a single company, for instance. If this company’s share price falls, there is a risk of hefty losses – and, if it goes bank­rupt, the inves­tor could be left with nothing. This typi­cal invest­ment mistake can be avoided by ensu­ring that the defi­ned invest­ment stra­tegy takes a number of asset clas­ses into account. To this end, the invest­ment amount should be distri­bu­ted amongst a large number of compa­nies and issuers within the invest­ment cate­go­ries. Diver­si­fi­ca­tion thus redu­ces the risk of losing ever­y­thing to near zero, because you’ll never have a situa­tion where all your holdings are in trou­ble at the same time. It also mini­mi­ses tempo­rary price losses, because the various invest­ments behave differ­ently depen­ding on the market phase and the influen­cing factors. In prin­ci­ple, every reduc­tion in risk goes hand in hand with a lower expec­ted return. Howe­ver, when it comes to diver­si­fi­ca­tion, you can enjoy bona fide risk reduc­tion – with no loss of returns.

Inves­t­ing mistake no. 4:
no clear invest­ment strategy

Another clas­sic – and equally avoida­ble – mistake when inves­t­ing is to cons­truct a port­fo­lio on a random basis (e.g. based on hot tips or pre-exis­ting stocks) rather than adhe­ring to a clear stra­tegy. Instead, it’s important to create an invest­ment stra­tegy aligned with indi­vi­dual objec­ti­ves and risk capa­city, i.e. divi­ding the assets to be inves­ted among diffe­rent asset clas­ses. The SwiPhiX also provi­des guidance here: the large foun­da­ti­ons contri­bu­ting to the index see equi­ties, bonds and real estate as the most important clas­ses. With these three cate­go­ries, you can define and imple­ment a profi­ta­ble, diver­si­fied and sustainable invest­ment stra­tegy (see also the new Swisscanto/ZKB foun­da­tion fund). Addi­tio­nal (alter­na­tive) asset clas­ses may be added to suit a foundation’s aims and needs.

Conclu­sion

Four simple basic rules for mana­ging a foundation’s assets:

  1. Assess liqui­dity needs and reser­ves reali­sti­cally, invest all further assets (not inves­t­ing is the biggest mistake!).
  2. Choose a clear and appro­priate invest­ment stra­tegy (make use of risk capacity!).
  3. Imple­ment this invest­ment stra­tegy consis­t­ently and in a diver­si­fied manner (pay atten­tion to costs!).
  4. In the event of short-term down­turns, remain calm and stick to the strategy.

SwiPhiX
Around 80 mixed asset manage­ment manda­tes with a total volume of around CHF 4 billion, mana­ged by Zürcher Kanto­nal­bank, curr­ently serve as the data source for SwiPhiX. All manda­tes are weigh­ted equally when calcu­la­ting average perfor­mance. The index deve­lo­p­ment is deter­mi­ned by linking the average monthly perfor­mance. The average asset struc­ture on which SwiPhiX is based serves as a guide for the invest­ment stra­tegy of the newly laun­ched Swisscanto/ZKB foun­da­tion fund (see zkb.ch/stiftungen).

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